Report: California economy to slow

By Alex Veiga, Business Week

The cooldown in California home construction will hamper the state economy next year but won’t trigger a recession, according to a new economic report.

The decline in building permits and jobs in the sector should bottom out late next year before showing any significant improvement, economist Ryan Ratcliff wrote in the quarterly Anderson Report to be released Thursday by the University of California, Los Angeles.

The latest forecast mirrors predictions made earlier this year.

In recent years, rapid appreciation of home values had helped fuel consumer spending, as home owners either felt better off financially or used home equity loans to finance buying.

But as home sales and price growth slow, economists speculated that consumers will cut back on spending, hurting the economy.

In the latest Anderson Forecast, Ratcliff suggested that consumer spending and retail sales have only slowed mildly. He doesn’t believe the weakening housing market will single-handedly send the economy into recession.

However, California’s financial health could be hurt even further if state lawmakers cut spending and employment because of a shortfall in revenue projected in the 2006-2007 fiscal year.

Ratcliff expects the state General Fund to go negative within two years unless lawmakers raise taxes, lower government spending or pursue a combination of both.

“Depending on the timing and the severity, this budget crunch could be the second half of the double whammy that turns a California housing slowdown into a housing recession,” Ratcliff wrote.

The housing crunch has also hurt job creation, which declined 36 percent in the first 10 months of the year, compared to the year-ago period, according to the report.

The construction industry had been the third-biggest source of new jobs in the state between October 2003 and October 2006, the Anderson Forecast said.

The report anticipates that payroll jobs, which don’t include farm workers or the self-employed, will stay flat while unemployment inches up to 5.2 percent by the end of 2007.

Personal income and taxable sales are also expected to slow, Ratcliff wrote.

Nationally, the forecast stops short of predicting a recession, although its authors do see slowdowns in economic growth and employment as the U.S. housing market cools further.

Edward Leamer, a co-author of the Anderson Forecast, suggested housing starts will bottom out at 1.4 million in the second quarter of 2007. The starts had been exceeding 2 million a year before steadily declining.

The price of new homes could fall another 10 percent, Leamer said.

“Existing home prices are expected to nudge down a bit but not nearly as much as new home prices,” Leamer wrote.

Leamer also sees annual U.S. employment growth declining from 1.5 percent to 0.3 percent in the second quarter of next year. He also expects the national unemployment rate to edge up to 5.1 percent from 4.6 percent.

Leamer forecasts the U.S. economy will improve beginning in 2008.

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